It is hoped the move - the biggest ever cash injection from the Bank of England - will encourage banks to resume lending to each other, which would help ease the mortgage market and stop the housing market slipping further.

Here are some initial reactions from industry analysts and economists in the City:

Simon Ward, New Star

The Bank of England’s new “special liquidity scheme” may prove ineffective because of its unattractive fee structure. The scheme appears to be in the spirit of the term auctions of three-month funds last autumn.

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These attracted no bidders because the Bank set the minimum bid rate at a penal level. The fee payable on a swap of mortgage-backed securities for Treasury bills will be the spread between three-month Libor and the three-month gilt repo rate – currently about 100 basis points.

A floor has been set at 20 basis points but is irrelevant. Banks will use Treasury bills to obtain funds in the market at the gilt repo rate. Their total cost of funding – including the fee – will therefore equal Libor. The scheme will help any institutions currently unable to access interbank funds at Libor but seems unlikely to result in a significant reduction in the current wide Libor-Bank rate spread.

There is a danger that use of the scheme will be interpreted as an admission of weakness. The major banks may have agreed to participate in the scheme regardless of their need for funds to mute this signalling effect. The scheme differs significantly from the Federal Reserve’s term securities lending facility, in which fees are set in an auction subject to a minimum for AAA-rated asset-backed securities of 25 basis points.

Details of the latest auction show that some participants paid the minimum fee, implying the swap will have allowed them to obtain funds in the market significantly below Libor. The Bank of England appears to have rejected a comparable fee structure because of “moral hazard” concerns. The relatively restrictive nature of the scheme suggests the Libor-Bank rate spread will remain elevated and the onus will be on the Bank’s Monetary Policy Committee to bring market rates down via further cuts in its Bank rate

British Bankers' Association

"The collateral swap arrangement is an innovative and unique policy response. The banks are participating in this arrangement and expect it to make a significant contribution to alleviating the pressures in the UK money markets. Restoring confidence in the wholesale funding market will strengthen the financial system and the stability of our economy."

Philip Shaw, Investec

"It's a very positive step that should help major banks unlock significant parts of their balance sheet.

"It is similar to the Fed's Term Securities Lending Facility but it is a longer term swap arrangement - for one to three years - unlike the Fed's facility which is only for 28 days.

"It should give a kick-start to mortgage lending."

George Buckley, UK economist, Deutsche Bank

"It is very similar to the leaks that we had. It will certainly help, but banks have far more than 50 billion pounds of mortgage debt on their books so it's not going to solve the situation."

Richard McGuire, RBS Capital Markets

"The details are as had been expected by the market given that they had been leaked towards the end of last week, so we are seeing no discernible market reaction to what is being broadcast now.

"More broadly speaking, I think the Federal Reserve is instructive in that the U.S. president has shown that specific measures designed to offset the credit crunch are complements rather than substitutes for policy action. We suspect that this will be no different and we still look to the Bank of England to adopt a more pro-active stance as regarding this current easing cycle."

Lena Komileva, Market Economist at Tullett Prebon

"I think it's a positive step versus what the Federal Reserve and the ECB have been doing in that it provides good quality collateral for longer periods of time.

"It will have a positive impact on the money market but it's unlikely that it will have any meaningful impact on unlocking mortgage markets.

"Although it's a positive sentiment measure, its implications are much more for the short end of the market rather than improving meaningfully the outlook for liquidity at a time when securitisation markets, mortgage-backed markets are still illiquid.

"It will probably not have a big impact on the economy because it's simply removing illiquid assets off balance sheets, rather than encouraging the banks to issue more mortgage debt. The terms are aimed at improving bank liquidity as opposed to providing liquidity directly into the mortgage market."

Geraldine Concagh, AIB Group Treasury in Dublin

"It remains to be seen how effective the plan is. I don't know if it's going to be sufficient as the credit squeeze (in the UK) is quite pronounced and it's only a matter of time to feed through to the rest of the economy."

Marc Ostwald, Insigner de Beaufort

"In some ways it has the hallmarks of other deals that we've seen. I think the clever part within this is that fee is being tied up between the general collateral 3-month gilt repo rate and 3-month LIBOR.

"If we go back to what the British Bankers' Association did last week, there is a nice little tie-up here in that if the banks shove up LIBOR it's going to cost them more to borrow as the fees are tied up to this.

"This makes it not in their interest to really pump up the LIBOR rate, which is a clever little ruse.

"The other thing I like about it is that it's an open window rather than having a weekly auction or sale.

"The real market impact in the first instance will be to boost the equity prices of UK banks. It should also to some extent alleviate the pressure on the front of the gilt market."

Richard Lambert, the director-general of the CBI

"This is an important and clever step towards rebuilding confidence in the banking system and normalising the inter-bank credit markets.

"It should encourage banks to be more willing to lend to one other, through the injection of liquidity and from the improved confidence that counter-parties will be able to pay the money back. Most important, the scheme ensures that the risks remain with the banks, not the public purse.

"The duration and potential extent of the package will inject some longer-term stability into the banking system, while the penal rates and bar on borrowing against loans made this year will prevent banks from using this capital to create new business.

"Two key aspects of the package are that it allows banks to improve their capital base – shoring up their position and allowing them to lend more – and that it establishes some benchmark prices for complex assets, allowing the banks to better assess their losses and how to provision for them.

"The scheme is not designed to bail out the mortgage market, though in re-establishing confidence in the whole financial services system, it should benefit as part of the wider process.

"The acid test will be over the coming weeks whether these measures can bring interbank rates more closely into line with Bank base rate."